Financial markets: member states agree position to revise EU rules on central securities depositorie

EU member states settled their negotiating position on a proposed update of the central securities depositories regulation (CSDR).

The planned review will make EU securities settlement more efficient by simplifying requirements and clarifying authorisation processes among other things.

Securities are tradable financial assets such as stocks or bonds. Central securities depositories (CSDs) play a crucial role in their registration and safekeeping, as well as, following a trade in securities, in ensuring its proper settlement, i.e. delivery of securities to the buyer against the delivery of cash to the seller. According to European Commission figures, transactions settled by EU central securities depositories in 2019 reached around €1,120 trillion.

Lowering barriers for cross-border settlement and improving supervision

Because passporting requirements are burdensome, they hinder cross-border settlement, thus minimising competition and reducing choice. Passporting allows a financial firm to operate across the EU with one single licence. This regulation aims in particular to increase the provision of cross-border settlement by CSDs.

The proposed new rules – if adopted – clarify that it is the home member state, i.e. where the CSD is authorised, that will ultimately decide on the CSD’s application to provide cross-border services. In the case where the CSD’s activities in at least two other member states are considered of substantial importance for the functioning of the securities markets and the protection of investors, a college of supervisors will be mandatorily set up. This will facilitate the exchange of information between supervisors and ease the cooperation between member state authorities. The timeframe of the passporting process will also be clarified and shortened, in order to facilitate the provision of a broader scope of services across the member states.

The proposal also further streamlines rules on so-called “mandatory buy-in”: where a transaction has failed to settle at the end of a prescribed period, the buyer of the securities could be forced to repurchase them elsewhere. The failing party would then be required to meet any price differential between the original and new transaction and all costs of the mandatory buy-in. Mandatory buy-in would be a new measure of last resort, to be activated only in the case where the level of settlement fails would be substantial in the EU.

The proposal also includes provisions on enabling CSDs’ access to banking-type ancillary services from other duly authorised CSDs, so as to facilitate settlement in non-domestic currencies. Furthermore, it also lays down rules ensuring that authorities in the EU have adequate powers and information to monitor risks in relation to both EU and third country CSDs, including by enhancing their supervisory cooperation.

All these clarifications would thus bring the CSDR in line with other financial service legislation.

Background and next steps

On 16 March 2022 the European Commission proposed changes to the CSDR. The CSDR, adopted in 2014, was part of a broader set of rules to regulate the financial markets in the wake of the 2008 financial crisis. It introduced common standards for the institutions responsible for securities settlement and paved the way for a single market for services provided by securities depositories.

In 2019 the Commission had undertaken a legally mandated review of the CSDR.

Today’s agreement – reached by EU member states’ ambassadors – will allow the Council to start negotiations with the European Parliament to agree on a common text. The European Parliament is still in the process of adopting its position.